Earlier treasury benchmarking exercises focused on the organisational elements of the treasury department: the number of full time employees (FTEs) in the treasury team, how much time was spent on risk management in comparison to cash management, how many FX trades were done on a monthly basis, for example. Over the last decade, as treasury has been thrown into the spotlight, more questions have been asked of the treasurer as to the activities undertaken by the treasury team – and more importantly how well (or not) the team performed in managing these activities. In parallel, the increased usage of treasury management systems (TMS) by corporates and the increased capabilities of these TMSs have also significantly enabled the evolution of more operational treasury benchmarking.
The next step in the treasury benchmarking evolution is the measurement and subsequent benchmarking of the ‘value’ treasury is adding to the organisation. Treasury value can be aligned with the creation of shareholder value (SHV) or economic value added (EVA) as introduced by Stern Stewart & Co. in 1982. EVA, however, measures the value of the organisation as a whole and therefore to understand the treasury value a split between business value added (BVA) and treasury value added (TVA) is required.
BVA can be created by focusing on the core business activities: sales growth, profit margin and investments. This is the most important SHV component of a successful company. However, no organisation can be consistently successful without the strategic and operational support from its treasury department. Therefore, TVA can be created by optimising treasury operations, risk management and corporate finance – but this can be easier said than done! Calculating the total TVA for a large multinational can be extremely challenging and treasurers should focus on what drives treasury value.
Here, key indicators can be of assistance and are typically defined based on risk (KRIs), performance (KPIs) and value (KVIs). These will help guide the treasurer to quantify the overall total benefit and purpose of the treasury department.
KRIs represent early warning signals and limits risk in which treasury needs to operate. The focus is on how corporate treasury manages risk. Examples include: financial covenants, hedge targets and ratios, counterparty limits, financial headroom, risk bearing capacity, earnings-at-risk (EaR) or cash flow-at-risk (CFaR), or rate sensitivity. They can also focus on how well treasury has control over its operations – hedging performance or the overall risk reduction of the organisation, for instance.
KPIs aim to measure operational excellence of the treasury processes. Examples include: cash flow forecasting accuracy, target weighted average cost of capital (WACC), and speed of account opening and percentage and timing of confirmation accuracy. KPIs generally measure how well treasury is able to perform its day-to-day activities.
KVIs are the metrics by which the added-value of the treasury function is measured. These are typically based upon the discretionary mandate it has been given by the company. Besides ‘traditional’ operations such as the realised hedging result, treasury can act as a consulting partner to other business units. This ‘intangible’ added-value can be measured in a treasury value scorecard, enabled by technology and reporting from the TMS.
Previously, it was difficult to benchmark different types and sizes of treasury organisations on a specific treasury area but a three-stage approach of: i) gaining control ii) optimising performance and iii) achieving strategic objectives, can help. This allows true ‘value’ benchmarking of a best-in-class treasury, irrespective of type and size.